Supply Chain Finance in Bangladesh

Supply chain finance is acknowledged as a renowned form of financing throughout the world.
One of the primary reasons behind considering it as a product with a lower delinquency rates
by the global banks is, it diminishes the risk of misappropriation of funds and certifies the
authenticity of cash flow of the borrowers. Moreover, it aids the banks in taking exposure,
depending on the stature of large corporates and through which the payments will get assigned
to. Despite having its existence for over 20 years in the financial markets of the country, supply
chain finance has not reached the expected yield level as of yet. First off, a lack of
understanding regarding the concept of supply chain finance and its products still exists in the
market, in spite of having all the chances of being lucrative in Bangladesh market. Besides,
corporate entities are not stepping forward in terms of backing up their suppliers, because of
which suppliers take the funds at a sky-high rate. In case of non-payment of corporates, the
supplier gets the floor to act as a delinquent to the banks, which is quite an unconventional
practice in traditional loan products.
The Concept of Supply Chain Finance in Context to Bangladesh
Supply chain finance, also known as supplier finance is the finance solution that finances the
suppliers against the goods supplied. This solution optimizes cash flow of the suppliers and
allows the buyers to lengthen their payment terms while providing the option for their large
and SME suppliers to get paid early. There are three parties involved in this arrangement:

 buyer,
 seller and
 financer.
In Bangladesh, factoring (supplier financing), reverse factoring, and distributor financing are
mainly considered as products of supply chain financing.
Factoring
Factoring is a financial transaction and a type of debtor finance in which a business sells its
accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. When a
supplier supplies good to a buyer company, they usually agree to a credit term of say 30 to 90
days. The supplier company’s capital remains blocked for that term which slows down its
business and reduces its liquidity. In case of factoring, the supplier can submit its invoice of the
sold goods to a financer for getting financed against that bill. The financer then verifies the
invoice and gets an assignment of payment agreement from the buyer which ensures the buyer
will pay the supplier’s bill to the financer. The assignment of payment from the buyer acts as a
collateral of the loan granted to the supplier. The financer usually grants 80% of the invoice as a
loan to the supplier and gives the rest 20% deducting its interest and fees when the buyer pays
off the bill at the end of its credit term. This arrangement can also be availed as a short term
revolving credit agreement for up to one year according to the business requirement.

 
Reverse Factoring
In case of reverse factoring, the buyer applies to a financer for financing its payables to
suppliers and agrees to pay the financer within a new credit term along with interest. This
solution enables the buyer to extend its payment terms without blocking its suppliers’ cash
flows. The benefit of a reverse factoring facility is that it is usually a simple system set up and
there are lower costs involved to the supplier. The reason is due to the funder taking credit risk
on the large corporate compared to the small supplier. The financier behind a scheme may also
charge the supplier a couple of percent of their funding line, to join the reverse factoring
scheme.
Distributor Financing
Another form of supply chain financing in our market is distributor financing. A distributor can
get financing through submitting its lifting order from the manufacturing company as a
collateral. The financer pays for the product after verifying the lifting order and the distributor
repays the loan within an agreed credit period.

Globally, reverse factoring is a more popular form of financing as it reduces the cost of big
entities, enabling them to arrange a financing mode for their suppliers thereby ensuring that
the suppliers can keep on supplying goods to meet large volume demands. Since both the buyer
benefits from being able to extend their payment terms, and the supplier is receiving payment
earlier; it has become a preferred method of financing for both sides of the manufacturing
chain. By taking advantage of reverse factoring, corporate entities are not putting their business
into any debt. They are getting a flow of working capital to continue to function and meet their
customers, vendors and employees’ needs. Reverse factoring is not that common in Bangladesh
right now. Only some large corporates with excellent credit records are involved in this, as it is
quite risky to finance such large amounts without any collateral. Hopefully, it will be popular in
the future along with good business practice on the debtor’s part. Reverse factoring might
be the fi nancing vehicle for small and medium enterprises (SMEs) sector in
Bangladesh.
Evoluti on of Supply Chain Finance in Bangladesh
IDLC Finance Limited initiated the concept of Supply Chain Finance in Bangladesh back in 1999,
when it was still an untapped financing domain for the financial institutions of the country.
Right after United Finance Limited began to offer the facility in 2006, LankaBangla followed suit.
During that period, IPDC had a very small portfolio of supply chain finance, even though it was
terminated later on. In 2016, IPDC Finance re-entered the market strongly with an aim to grab
the lions share portion of the market through supply chain finance.  In the meantime, some of
the top-notch banks offered this facility and formed their own portfolio at a small scale. In
Bangladesh, factoring is very common among any other types of supplier financing.  Whereas
reverse factoring is not much practiced here, due to the fact that the corporate entities are not
interested to go the extra mile for their suppliers.

Supply Chain Finance Industry Timeline

1999 IDLC was the pioneer in the supply chain finance

industry and commenced its operation from 1999.
2006 LankaBangla Finance and United Finance entered
the industry.
2007 IPDC Finance and EBL started their operations. The
same year IPDC Finance exited the industry.
2016 Various banks like City Bank, Brac Bank and others
entered the arena.
2017 IPDC Finance and EBL reentered the market with
renewed strategies and planning.

Current Industry Scenario

Supply chain finance is really popular around the globe including in our neighboring countries.
Countries like India and Sri Lanka provided supply chain financing business with policy backups
and proper monitoring to increase accountability and ensure credibility. Financers in our
country are providing supply chain financing to a few number of sectors on a limited scale
because of the risks involved due to the lack of policy backups, proper monitoring and credible
business practice among the companies. Our supply chain financing market is estimated to be
around BDT 6.14 billion as of April 30, 2019. Even five years back, we estimated this market to
be of around BDT 30 billion. Supply chain finance is mainly an NBFI product and so NBFIs have
larger share in the market. Some banks are approaching the market with digital platform but
mostly banks do not project much focus on this product. The process of attaining assignment of
payment and approving the loan requires to involve manpower which NBFIs can do more
dedicatedly than banks. IPDC is the market leader with a supply financing portfolio of around
BDT 2.40 billion while LankaBangla Finance has around BDT 1.51 billion and United Finance has
1.24 billion in their supply financing portfolios respectively. The banks are still lagging behind in
this arena. Some banks have introduced digital platforms for enabling supply chain finance such
as Dhaka bank and City bank. Dhaka bank has only around BDT 30 million and City bank has
only BDT 140 million in their supply financing portfolio. Among the NBFIs, IPDC already has their
digital platform and LankaBangla Finance will soon be also launching their own digital platform.
Our growing economy has tremendous opportunity for supply chain finance to flourish but all
the stake holders and the regulators should work together to make that happen.

Financial Institution In BDT billion

IPDC Finance Ltd. 2.40
LankaBangla Finance Ltd. 1.51
United Finance Ltd. 1.35
IDLC Finance Ltd. 0.59
City Bank Ltd. 0.14
National Finance Ltd. 0.08
Dhaka Bank Ltd. 0.03
IIDFC Ltd. 0.03
Meridian Finance Ltd. 0.007
Total 6.14
Source: Market Participants
Data as of 30 April 2019
The Role, Risks and Benefits of Stakeholders of the Supply Chain Finance Industry

Supply Chain Financing for SMEs

Globally, supply chain financing is a prominent external source of financing for SMEs and
corporate entities. In the emerging economies, SMEs face great difficulty in accessing credit
facilities and suffer from shortage of working capital. Supply chain finance is considered an ideal
solution for SMEs. It links small vendors to the large corporates, which enables SMEs to access
credit at a lower cost with minimal documentation and lesser collateral. The challenge in SME
lending is to reach and identify the new-to-banking borrowers and accuracy of financial data of
the borrower. This gets alleviated to a large extent in supply chain finance by generating credit
comfort from borrower’s transactional behavior with large corporates. In recent years, Non-
Bank Financial Institutions (NBFIs) have played a significant role in introducing supply chain
finance to the big suppliers for domestic trade. In most cases, supply chain finance has now
become somewhat of an exclusive product offered by Non-Bank Financial Institutions in this
country. Though the Supply Chain Finance products were introduced in the financial market
long ago, it withstands that SCF requires significant operational resources for the financing
banks/FIs to effectively mitigate the operational risk involved in the process, thus resulting in
slow penetration in Bangladesh market. Besides, one of the major reasons is the lack of
awareness among the SMEs regarding these sorts of unconventional financing facilities. Most of
the SMEs are not aware of their eligibility to get supply chain finance in relatively easy terms
and condition. Moreover, promotion and communication from financial organization’s end are
still inadequate in volume. Because these products are operated in a completely manual
environment, financial institutions are not able to expand the financing facility beyond mega
cities. But as we can see, majority of the SMEs, who work as suppliers and distributors, do
business outside megacities.
Digital Supply Chain Platform
The increasing complexity of supply chains means that supply chain managers must use a
combination of tools, techniques and approaches to meet every day and long-term challenges.
Industry participants believe that blockchain can solve some of the supply chain finance
problems as technology makes data reliable, transparent and transaction settlement more
efficient, thereby improving financing and reducing business cost. Digitalization promises to
help organizations address some of the biggest challenges in the supply chain, ranging from
counterfeit components to the complexity of product recalls. Tencent FiT, a division of Chinese
media and tech giant Tencent, is creating an open supply chain finance platform based on
blockchain technology. IPDC Finance Limited, one of the key market players in supply chain
finance, has introduced IPDC Orjon, which is a digital supply chain finance platform powered by
Blockchain technology. Being the first of its kind, “Orjon” aims to create a holistic approach in
supply chain finance arena in Bangladesh. With this platform, IPDC aims to provide services like
factoring, reverse factoring, work order, and distributor financing. City Bank also launched a
digital “Supply Chain Finance and Distributor Finance Facility” through which suppliers will get
paid whenever invoices are approved while buyers will enjoy increased liquidity and improved
working capital. The online platform also enables SME businesses' easy access to finance,
particularly short-term working capital, along with other banking facilities. LankaBangla Finance
is also in talks to come up with its own digital platform for supply chain financing. Although
digital platform brings together all the parties involved and saves processing time, buyers are
often reluctant to add this platform to their business system. More awareness seminar and
campaigns to make them better understand the advantages of having this platform are
necessary to further promote the digital platform.

Challenges of Supply Chain Finance in Bangladesh

Supply chain finance is a 20-years old market in Bangladesh. Despite being in the market for
such a long time, the product could perform to the desired level, due to some reasons.

Anchor’s Participation: Most of the corporate entities in Bangladesh conduct their business on
credit. They purchase goods on credit from the suppliers. however, corporate anchors are
reluctant to provide assignments for the goods delivered. Assignments are corporate Letter of
Comfort that provides FIs a minimum guarantee that the goods are received by the anchor and
the anchors recognize the credit amount as their payable. In that case, the receivable of the
supplier is recognized officially by the anchor and this Letter of Comfort lowers the risk level for
the supplier. Therefore, with assignment and with lower risk level, suppliers can manage the
fund in a low discounting rate which is beneficial for them. However, this practice is not evident
and this phenomenon makes the suppliers bound to take financing with higher rate. Eventually,
it demotivates the suppliers to use this mode of financing.

Many corporate entities that used to give assignments to the financer are not continuing with
the practice due to their negligence about supply chain financing.

Not yet a recognized product: Bangladesh does not have any specific policy guideline or legal
framework for factoring. Bangladesh Bank still does not recognize supplier finance as a separate
product. Till date, there is no separate circular on supplier financing products from Bangladesh
Bank. Currently it is being treated under the circular for Short Term Revolving Loan. Also, there
is no legal framework for the security of the payment for these products.

An evident practical problem that the FIs face for not having any specific policy guideline on
this product is, there is no law to make buyers liable for payment. Generally, there are two
options in a factoring deal: with recourse and without recourse. When a factoring contract is
made ‘with recourse’, the supplier is liable for the payment and in case of ‘without recourse’,
the buyer is liable for the payment. Currently, FIs can not exercise the ‘without recourse’ option
since there is no legal implication of this option in this market.

No CIB implication for the anchor/buyer: Since buyers don’t have any direct trade with the FI,
the financing contract does not reflect in their CIB. Therefore, in case of default, buyers are not
penalized in any way, which makes them more indifferent and non-liable when the supplier fails
to make the payment.

Reverse Factoring still not evident in Bangladesh: While in other parts of the world, reverse
factoring is a very popular mode of supply chain financing. In Bangladesh, the scenario is not
evident due to

Absence of regulatory policy regarding supply chain finance implies no legal implication on the
buyer/corporate entities. Rather, they prefer to go for composite facilities. Therefore, they tend
to nurture a lukewarm behavior towards this mode of financing. The other side of the coin
illustrates a scenario that few corporate entities who approach for reverse factoring, have
already their line of credit all used up. Therefore, it is prudent for the FIs not to go for those
buyers, since they pose a high probability of default.
The market demand of Supply Chain Finance is clearly
growing. Supply Chain F is now considered as a strategic
priority while making fi nancial decision of any type of
fi nancial institutions. Government should step up to monitor
and nurture supply chain financing in our economy. It can access
a huge untapped area of financing opportunities and can speed
up business cycles up to three times. Regulators can ensure
stability in supply finance with proper monitoring of debtors and
obligating the issuance of assignment of payment. Moreover, CIB
should include honoring assignment of payment as a criteria in a
company’s credit information to ensure accountability from
debtors’ end. There are scopes of supply chain fi nancing in
ready-made garment (RMG) sector, pharmaceuticals, SME
sector, agricultural products, contact growers, cottage
industries etc. Digitization of Supply Chain Finance and
trade fi nancing should be the ultimate destination of the
fi nancial institutions.